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Accelerated Benefit (Option) Rider:
- The accelerated benefit rider allows the insured to collect a part of the death benefit early if diagnosed with a terminal illness and expected to live for 1-2 years or less, as confirmed by a physician.
- Example:
- Emma has a $250,000 life insurance policy with an accelerated benefit rider. After being diagnosed with a terminal illness and certified by her physician as having less than 18 months to live, Emma is able to access 50% of her death benefit. She receives $125,000 to help cover medical expenses and other needs during her remaining time. The remaining $125,000 will be paid to her beneficiaries upon her death.
Beneficiary:
- The beneficiary is the person or entity specified in a life insurance policy to receive the proceeds upon the insured’s death.
- Example:
- Sarah names her spouse, David, as the beneficiary of her $500,000 life insurance policy. Upon Sarah's death, David will receive the full $500,000 death benefit to help cover living expenses, outstanding debts, and any other financial needs.
Cash Value
- This is the portion of whole life insurance policies that accumulates as savings or equity.
- Example:
- Lisa has a whole life insurance policy with a $200,000 death benefit. After 15 years of premium payments, her policy’s cash value has accumulated to $15,000. Lisa can choose to borrow against this cash value or withdraw it, while still keeping her life insurance coverage in place.
Class Designation:
- A class designation refers to identifying a group of beneficiaries (such as "all my children") instead of listing specific individuals by name.
- Example:
- For example, Robert names "all my children" as the class designation in his life insurance policy. This means that upon his death, the death benefit will be divided equally among all of his children, regardless of how many children he has at the time, without needing to list each child by name. If Robert has more children in the future, they will automatically be included as beneficiaries.
Common Disaster Provision:
- The common disaster provision, part of the Uniform Simultaneous Death Act, guarantees that if both the insured and the primary beneficiary die in a short time span, the death benefits go to the contingent beneficiary. The primary beneficiary must survive the insured by a certain period to receive the payout.
- Example:
- For example, Tom has a life insurance policy with his wife, Emily, as the primary beneficiary and their daughter, Lily, as the contingent beneficiary. The policy includes a common disaster provision If Tom and Emily are both involved in a car accident and Emily dies within 30 days of Tom’s death, the death benefit will bypass Emily and go directly to Lily. This ensures that the benefit is still distributed, even if the primary beneficiary does not survive long enough to claim it.
Contingent (Secondary) Beneficiary:
- The contingent beneficiary will receive the death benefit if the primary beneficiary predeceases the insured.
- Example:
- For example, Jack names his wife, Maria, as the primary beneficiary of his $500,000 life insurance policy and his brother, Alex, as the contingent beneficiary. If Maria passes away before Jack, Alex will receive the death benefit upon Jack’s death, ensuring that the funds still go to someone Jack has designated.
Earned Premium:
- Earned premium is the part of the premium paid by the policyholder for the insurance coverage they have received so far.
- Example:
- For example, if Susan pays an annual premium of $1,200 for her homeowners insurance policy and six months have passed, the insurer has "earned" half of the premium, or $600, for the coverage provided during that time. The remaining $600 is considered "unearned premium" until the coverage is provided for the second half of the year.
Expense Factor:
The expense factor, or loading charge, represents the expenses incurred by the insurance company to operate.
- Example:
- When determining the premium for a life insurance policy, the insurer includes a expense factor to cover the costs of operating the company, such as administrative fees, agent commissions, and marketing expenses.
Excess Interest:
- The excess interest provision in life insurance means that if the insurer earns more than the guaranteed rate, the cash value of a policy will grow at a faster rate.
- Example:
- Lisa's whole life insurance policy has a guaranteed cash value growth rate of 3%. However, because the insurer experienced strong investment returns that year, her policy benefits from the excess interest provision, allowing her cash value to grow at 4.5% instead. This means her cash value will accumulate more quickly than initially guaranteed.
Fixed Amount Installment Option:
- A fixed amount installment option disburses the death benefit in predetermined installment amounts until both the principal and the accrued interest are fully paid out.
- Example:
- Sarah's life insurance policy has a fixed amount installment option. After her death, the $200,000 death benefit will be paid to her son, Mark, in fixed installments of $1,500 per month. These payments will continue monthly until the entire $200,000, plus any accumulated interest, has been exhausted.
Fixed/Level Premium:
- Fixed or level premium involves spreading the total cost of a policy into regular payments. More frequent payments result in a higher overall premium.
- Example:
- Emily purchases a life insurance policy with a fixed/level premium of $1,200 annually. If she chooses to make monthly payments, her premiums will be $115 per month, which results in a total annual premium of $1,380. This higher overall cost reflects the added cost of more frequent payments.
Fixed Period or Period Certain Option:
- A fixed period or period certain option pays out the death benefit in equal installments over a specific number of years. The installment amount is determined by dividing the total benefit by the number of installments.
- Example:
- Michael’s life insurance policy has a fixed period option. After his death, the $300,000 death benefit will be paid out in equal installments over 10 years. Each year, his beneficiary will receive $30,000, until the entire death benefit has been paid out.
Graded Premium:
- A graded premium is a funding option where premiums start lower and gradually increase annually for a set introductory period. The premium rises to a higher rate than the initial level premium would have been once the introductory period ends, and remains unchanged for the duration of the policy..
- Example:
- Jennifer purchases a life insurance policy with a graded premium option. For the first five years, she pays a lower premium starting at $50 per month, which increases annually to $80 by the end of year five. After the introductory period, her premium jumps to $150 per month and remains fixed at that amount for the rest of the policy's duration.
Gross (Annual) Premium:
- The gross premium is the sum of the net premium for insurance coverage plus commissions, operating expenses, miscellaneous costs, and dividends.
- Example:
- John purchases a life insurance policy with an annual premium of $1,500. This gross premium includes the net premium required to cover the cost of insurance, plus commissions paid to the agent, administrative fees, and other operating expenses. Additionally, if the insurer offers dividends, those are factored into the calculation of the gross premium.
Interest Factor:
- The interest factor involves calculating the expected earnings from investing the collected insurance premiums.
- Example:
- When setting premiums, the insurance company considers the interest factor. For instance, if the insurer expects to earn 3% annually by investing the collected premiums, they can charge lower premiums while still ensuring they have enough to pay future claims. This anticipated investment return helps reduce the overall cost of the policy for the policyholder.
Interest Only Option:
- The interest-only option is a death settlement choice where the insurance company retains the death benefit for a specified period and provides the beneficiary with only the interest earned during that time.
- A minimum interest rate is guaranteed, and the interest must be paid out at least once a year.
- Example:
- Emma's life insurance policy has an interest only option. After her death, the insurance company holds the $250,000 death benefit and pays the interest earned to her beneficiary, Mark, at a guaranteed rate of 3% annually. Mark receives $7,500 per year in interest payments, while the principal remains untouched. The full $250,000 death benefit will be paid to Mark at a later date, or when he decides to receive the lump sum.
Irrevocable Beneficiary:
- An irrevocable beneficiary is one whose designation cannot be altered by the policyholder without obtaining written permission from the beneficiary.
- Example:
- David names his spouse, Laura, as the irrevocable beneficiary of his life insurance policy. After they divorce, Laura remains the beneficiary because David cannot change the designation without her written consent, even after the divorce. If David wants to name a new beneficiary, he must still obtain Laura's permission, as her irrevocable status gives her control over the beneficiary designation unless she agrees to the change.
Joint And Survivor Option:
- The joint and survivor option is a settlement choice that ensures benefits are paid for life to two or more individuals. This choice may have a period certain, and the payment amounts are determined by the beneficiaries' ages.
- Example:
- John and his wife, Mary, select the joint and survivor option for their life insurance settlement. This ensures that benefits will be paid as long as either of them is alive. If John passes away first, Mary will continue receiving the payments for the rest of her life. The payment amount is determined by their ages at the time of settlement. If they also select a 10-year period certain, and both pass away within those 10 years, their beneficiaries will continue receiving the payments for the remainder of that period.
Life Income Option:
- The life income option provides a death benefit settlement where the beneficiary receives a guaranteed income for life. Each installment amount is determined by the life expectancy of the recipient and the total principal.
- Example:
- Sarah selects the life income option for her life insurance policy. After her death, her beneficiary, Jack, will receive monthly installment payments for the rest of his life. The amount of each payment is determined by Jack's life expectancy and the total death benefit. Regardless of how long Jack lives, the payments will continue for his lifetime, ensuring he has a steady income that he cannot outlive.
Life Settlement:
- A life settlement involves a policyholder selling or transferring their life insurance policy to a third party for an amount that is less than the policy's expected death benefit.
- Example:
- David, at age 70, decides he no longer needs his $500,000 life insurance policy. He enters into a life settlement agreement, selling his policy to a third-party company for $200,000. While the company will receive the full death benefit when David passes away, David receives immediate compensation that is less than the policy’s death benefit but provides him with cash to use during his lifetime.
Lump Sum Option:
- The lump sum option for settling a death benefit involves paying the entire amount in one payment, after deducting any outstanding policy loans and overdue premiums.
- This option is typically the default choice for most life insurance policies.
- Example:
- When James passes away, his beneficiary, Maria, receives the $250,000 death benefit through the lump sum option. The payment is made in a single installment, minus a $10,000 outstanding loan balance, so Maria receives $240,000.
Modified Premium:
- Modified premium is a funding option where the initial premium is set lower than usual for an introductory period, typically lasting three to five years. After the introductory period, the premium increases to a level higher than the initial premium would have been and then remains fixed for the remainder of the policy's duration.
- Example:
- Emily purchases a life insurance policy with a modified premium option. For the first three years, she pays a reduced premium of $60 per month. After the introductory period, her premium increases to $150 per month, which is higher than what it would have been if she had started with a level premium. This new premium remains fixed for the remainder of the policy's life.
Morbidity Rate:
- The morbidity rate reflects the frequency and severity of disabilities anticipated within a specific group of individuals.
- Example:
- An insurance company offering disability policies evaluates the morbidity rate for a group of 1,000 workers in a high-risk profession. Based on their analysis, they estimate that 10 individuals will experience significant disabilities each year. This projected frequency and severity of disabilities help the insurer determine the appropriate premiums and coverage terms for the group.
Mortality Rate:
- The mortality rate is an expression of the number of deaths (either overall or from a specific cause) within a population, adjusted for the size of that population, over a given period.
- Example:
- An insurance company uses the mortality rate to assess the likelihood of death for a group of 1,000 individuals aged 65. Based on historical data, they estimate that 25 individuals from this group will pass away each year. This figure helps the insurer calculate life insurance premiums and determine the risk associated with providing coverage to this population.
Net Payment Cost Index
- The net payment cost index is a formula that calculates the true cost of a policy for the policyholder, allowing consumers to compare the cost of death protection over a period of ten or twenty years.
- Example:
- Jennifer is comparing two life insurance policies and uses the net payment cost index to determine which offers better value over a 20-year period. One policy has an index of $5.50 per $1,000 of death benefit, while the other has an index of $6.20 per $1,000. Based on this calculation, Jennifer chooses the policy with the lower net payment cost index, as it provides more affordable death protection over the long term.
Net (Single) Premium:
- Net premium is the amount calculated by an insurer to maintain policy reserves, considering interest earnings and mortality rates.
- Example:
- The insurance company calculates the net (single) premium for a life insurance policy by considering the mortality rate and expected interest earnings on invested premiums. For a 40-year-old policyholder, the net premium for a $100,000 life insurance policy might be $15,000. This calculation helps the insurer ensure they have enough reserves to cover future claims while accounting for mortality risks and investment returns.
Per Capita (By The Head):
- Per capita means distributing benefits equally among all named living beneficiaries.
- Example:
- John names his three children—Alice, Bob, and Claire—as beneficiaries of his life insurance policy under the per capita designation. If John passes away, the $300,000 death benefit will be evenly distributed among the three, with each receiving $100,000. If one of the children predeceases John, the remaining two will split the death benefit equally, with each receiving $150,000.
Per Stirpes (By The Bloodline):
- Per stirpes distributes benefits evenly according to the family line.
- Example:
- John names his three children—Alice, Bob, and Claire—as beneficiaries of his life insurance policy under the per stripe designation. If Bob passes away before John, Bob’s share of the $300,000 death benefit will be evenly distributed among Bob’s two children. This means Alice and Claire will each receive $100,000, and Bob’s two children will each receive $50,000, ensuring the benefit is passed down through the family line.
Premium Mode:
- The premium mode refers to how often a policyholder chooses to make premium payments.
- Example:
- Sarah chooses an annual premium mode for her life insurance policy, paying $1,200 once a year. Alternatively, she could have selected a monthly premium mode, paying $110 per month, which would result in a slightly higher total of $1,320 for the convenience of spreading out the payments
Primary Beneficiary:
- The primary beneficiary is the first person designated to receive the benefit proceeds when the insured passes away.
- Example:
- David names his wife, Emma, as the primary beneficiary of his life insurance policy. Upon David’s death, Emma will receive the full death benefit. If Emma predeceases him, the benefit would then go to the contingent beneficiary, as specified in the policy.
Policy Proceeds:
- Policy proceeds refer to the amount paid out as a death benefit, surrender value, or maturity benefit.
- For death benefits, it includes the policy's face value plus earned dividends minus any loans and interest.
- For surrender benefits, it includes the cash value minus surrender charges and loans.
- For maturity benefits, it is the cash value less loans and interest.
- Example:
- When John passes away, the policy proceeds of his life insurance policy amount to $250,000. This includes the face value of the policy, plus $5,000 in earned dividends, minus a $10,000 outstanding loan and accrued interest. His beneficiary, Mary, receives $245,000 after these adjustments. Similarly, if John had surrendered the policy, the proceeds would have included the cash value minus any surrender charges and outstanding loans.
Reserves:
- Reserves are the funds an insurance company sets aside, as required by state laws, to ensure they can pay future claims.
- Example:
- An insurance company maintains reserves to ensure they can meet future claims. For instance, if the company has issued a large number of life insurance policies, they are required by state law to set aside a portion of the premiums collected in these reserves. These funds are used to pay out claims when policyholders pass away, ensuring the company remains financially stable and able to fulfill its obligations.
Revocable Beneficiary:
- A revocable beneficiary is one whom the policy owner can change at any time without needing to inform or obtain consent from the beneficiary.
- Example:
- John names his daughter, Emily, as the revocable beneficiary of his life insurance policy. Since Emily is a revocable beneficiary, John can change the beneficiary to someone else at any time without needing to inform her or obtain her consent. This gives John flexibility in managing his policy as his circumstances change.
Settlement Options:
- Settlement options are various ways that life insurance policy proceeds can be paid out, including interest only, lump-sum cash, fixed-amount, fixed-period, and life income.
- Example:
- When Sarah passes away, her life insurance policy offers several settlement options to her beneficiary, Michael. He can choose to receive the death benefit as a lump sum, opt for the interest only option where the insurer holds the principal and pays him interest, or select a fixed-period option where the benefit is paid over a set number of years. Other options include receiving fixed-amount payments until the benefit is exhausted or a life income option where payments continue for the rest of Michael's life.
Single Premium Funding:
- Single premium funding involves paying a one-time premium to fully fund a life insurance policy, which then provides lifelong coverage without requiring further payments.
- Example:
- Lisa, at age 40 and in good health, chooses single premium funding for her life insurance policy. She pays a one-time premium of $50,000, which provides her with a death benefit of approximately $250,000. This fully funds her policy, giving her lifelong coverage without any further premium payments.
Spendthrift Clause:
- The spendthrift clause protects policy proceeds from being claimed by creditors upon the insured's death and can also prevent beneficiaries from spending the benefits irresponsibly by stipulating that the benefits are paid out in fixed amounts or installments over a specified period.
- Example:
- John's life insurance policy includes a spendthrift clause. When he passes away, the $500,000 death benefit is protected from his son Mark’s creditors. Instead of a lump sum, Mark receives the benefit in fixed monthly installments of $5,000 over 10 years, ensuring that the funds are not spent irresponsibly and providing long-term financial security.
Surrender Cost Index:
- The surrender cost index is a formula that helps calculate the average cost-per-thousand dollars of coverage for a policy that is cashed in for its value, assisting in cost comparisons for policies expected to be surrendered in ten or twenty years.
- Example:
- Megan is comparing two life insurance policies and uses the surrender cost index to evaluate which would be more cost-effective if she plans to surrender the policy in 20 years. One policy has a surrender cost index of $5.00 per $1,000 of coverage, while the other has an index of $6.50. Based on this calculation, Megan chooses the first policy because it has a lower average cost per thousand dollars of coverage if she decides to surrender it for the cash value in the future.
Tertiary Beneficiary:
- The tertiary beneficiary is next in line to receive death benefit proceeds if both the primary and secondary beneficiaries are unable to.
- Example:
- John names his wife, Sarah, as the primary beneficiary of his life insurance policy, and his son, Michael, as the contingent beneficiary. He also designates his daughter, Emma, as the tertiary beneficiary. If both Sarah and Michael pass away before John, Emma will receive the death benefit as the tertiary beneficiary.
Underwriting Department:
- The underwriting department is the division within an insurance company tasked with reviewing, approving, or declining insurance applications and determining risk classifications.
- Example:
- When David applies for a life insurance policy, the underwriting department reviews his application, medical history, and lifestyle information. Based on this review, they assign him a risk classification and determine the premium he will pay for his coverage. If any issues arise during the review, such as health concerns, the underwriting department may request additional information before approving or declining the application.
Unearned Premium:
- Unearned premium refers to the portion of the premium that has been paid for insurance coverage not yet provided.
- Example:
- Sarah pays an annual premium of $1,200 for her homeowners insurance policy, but after three months, she decides to cancel the policy. Since the insurance company has only provided coverage for three months, the remaining nine months of the premium—$900—is considered unearned premium and will be refunded to Sarah.
Uniform Simultaneous Death Act:
- The Uniform Simultaneous Death Act dictates that if the insured and the primary beneficiary die simultaneously, or nearly so, in an accident without it being clear who died first, it is assumed the primary beneficiary died first. The death benefit will go to the contingent beneficiaries.
- Example:
- John and his wife, Emily, are both involved in a car accident and pass away around the same time. Since it is unclear who died first, the Uniform Simultaneous Death Act assumes that Emily, the primary beneficiary, died before John. As a result, the death benefit from John's life insurance policy is paid to their children, who are named as the contingent beneficiaries.
Viatical Settlement:
- A viatical settlement is when an individual with a terminal illness sells their life insurance policy to a third party for a portion of the death benefit.
- Example:
- Mark, who has been diagnosed with a terminal illness, decides to enter into a viatical settlement. He sells his $500,000 life insurance policy to a third-party company in exchange for $300,000. The company will receive the full $500,000 death benefit when Mark passes away, but Mark gets immediate access to funds to help cover medical expenses and improve his quality of life during his remaining time.
Viatical (Viatee):
- In a viatical settlement, the new third-party owner is referred to as the viatee or viatical.
- Example:
- Mark, diagnosed with a terminal illness, sells his $500,000 life insurance policy in a viatical settlement. The third-party company, known as the viatee or viatical, pays Mark $300,000 upfront. The company now owns the policy and will receive the full $500,000 death benefit upon Mark's death.
Viator:
- The viator is the original owner of a life insurance policy who sells it in a viatical settlement.
- Example:
- In a viatical settlement, Mark, who is terminally ill, is the viator. He sells his $500,000 life insurance policy to a viatical settlement provider in exchange for $300,000. As the viator, Mark is the original policyholder who receives the settlement, while the provider takes ownership of the policy and will receive the death benefit upon Mark’s passing.